Germany Takes Back Its Gold

The global financial system is a complicated network of market participants that are constantly rewriting the rulebook in the wake of the recent economic crisis. However, the old wisdom that “if you don’t hold it, you don’t own it” is more evident today than ever before. This concept is not lost on the world’s second largest holder of gold reserves.

Earlier this week, Germany’s Handeslblatt newspaper claimed that the country’s Bundesbank developed a new strategy to bring home gold reserves. For various reasons such as security and international trade, some central banks around the world store their gold bullion with the Federal Reserve Bank of New York in lower Manhattan. Coming in second only behind the United States, Germany has almost 3,400 tonnes of gold, representing 74 percent of its reserves.

On Wednesday, the Bundesbank confirmed the reports and announced it will repatriate a portion of its foreign gold reserves. Over the next seven years, the central bank intends to store half of Germany’s gold reserves in its own vaults within the country, compared to only 31 percent now. The other half will remain in New York and London.

In a press release, the Bundesbank explains, “With this new storage plan, the Bundesbank is focusing on the two primary functions of the gold reserves: to build trust and confidence domestically, and the ability to exchange gold for foreign currencies at gold trading centres abroad within a short space of time.”

The plan is set to be completed by 2020, and will remove 300 tonnes of gold from New York, reducing Germany’s percentage of reserves held at the New York Fed from 45 percent to 37 percent. Another 374 tonnes will be relocated from Paris to Frankfurt, which removes all of Germany’s gold held in France’s capital. Since France and Germany both use the euro as national currency, the Bundesbank notes it is “no longer dependent on Paris as a financial centre.” Gold reserves held in London will remain the same at 13 percent.

Germany’s effort to bring its gold back home comes after the country’s Federal Court of Auditors called on the Bundesbank to strengthen its bullion auditing procedures, since the gold holdings have never been fully checked. Naturally, Germany’s motive for storing more gold at home is being questioned. The euro currency was first introduced in 1999. Did it really take the Bundesbank more than a decade to realize it is “no longer dependent on Paris as a financial centre?”

When it becomes serious you have to lie…

Jean-Claude Juncker, the prime minister of Luxembourg and longest-serving head of government in any European Union state, claimed last year that “when it becomes serious, you have to lie.” Germany might have been paying attention.

In October, the Bundesbank denied rumors it was worried about its gold reserves. In a statement, the central bank explains, “There was never any doubt about the security of Germany’s gold. In the future, we wish to continue to keep gold at international gold trading centres so that, when push comes to shove, we can have it available as a reserve asset as soon as possible. Gold stored in your home safe is not immediately available as collateral in case you need foreign currency.”

The Bundesbank even told the New York Fed shortly thereafter, “Please let me also comment on the bizarre public discussion we are currently facing in Germany on the safety of our gold deposits outside Germany – a discussion which is driven by irrational fears.” Technically, Germany will still have some gold at international trading centres, but it will be a reduced amount, safety reasons or not.

Given the current state of the financial system and the movement from one crisis to the next, it is not too surprising to see Germany call some of its gold back home. Even if they do not have trust issues, Germany can take comfort in knowing that their gold is under their own control.